Russian Ad Company Plays Catch Up With Online Division

[Moscow, RUSSIA] Some would say it had to happen, eventually: The one sector of the Russian
Internet that had remained free of outside investments -- that of
advertising agencies specializing in the Web -- is set for a change of
direction.

Russian advertising group Video International, which until now
specialized in TV, radio and written press advertising, recently launched
an online advertising branch, IVI (Video International Interactive), which
will begin its activities September 15.

Joining the trend is American businessman Peter Gerwe,
who operates in the Central and East European mass media sector and owns
stakes in firms including TV channel STS, and who has invested a hefty sum
in the
venture. The exact amount has not been disclosed, but it represents more than
25 percent of IVI's shares and "a seven-digit sum in dollars."

Still, advertising agencies only account for a small amount of the total
turnover generated by Internet activity. According to Timofey Bokaryov,
general director of one of these agencies, promo.ru, there are "five to
six" serious firms in this line of business in Russia. Among the leading
names, said Alexander Andreyev, an Internet analyst with investment bank
Brunswick Warburg, are manifest.ru, Proryv and promo.ru.

According to
Mark Sanor, director of corporate finance with Arthur Andersen Moscow, the
majority of deals are struck directly between Net holdings and advertisers,
and several of these Internet holdings -- including ru.net, The Rambler
Group or NetBridge -- are at least partially
controlled by Western investors.

"The
Russian advertising market as a whole was badly shaken by the August 1998
financial crisis and is only now starting to bounce back, and the Internet
advertising market is still in its early days," Sanor said.

Gerwe said that he didn't expect to break even on his investment before two
to four years, and named as subsector obstacles the poor quality of telecom
services and high PC costs.

"We look at this as at a marathon," he said.

When asked for their reasons for looking ahead,
observers and players alike point to the growth of the Net advertising
market's success in the West and note that there is no reason the same
progress won't take off in Russia. For instance, Gerwe said last year that
the U.S. Internet ad
business had a turnover of $1.9 billion, exceeding outdoor advertising by
$300 million. And, taking a smaller market, Italy's Net advertising
amounted to $15 million two years ago, it was up to $40 million in
1999 and is expected to reach $300 million in 2000.

Second, as the Russian Web develops, experts predict Internet advertising
here will grow strongly in the very near future -- others claim that the
spike has already begun. According to Bokaryov, citing figures by Arthur
Andersen, Internet advertising in Russia amounted to $2 million last year
and is expected to reach $5 million in 2000, $30 million in 2001 and $150
million in 2003. And, Brunswick Warburg's Andreyev said, Net advertising's
proportion of total advertising in Russia is also likely to rise in the
near future.

Finally, another sign of the growth
of the market is that the volume of banner exchange is declining, and the
number of financial transactions between an advertiser and a Web site and/or
an advertising agency is increasing, Andreyev said.